After a period of relative stability that saw it trade at 53-55 to a dollar for much of this year, the rupee is experiencing a fresh bout of weakness. Since early May, it has fallen from under 54 to just over 57 and is within striking distance of the all-time-low of 57.22-to-the-dollar touched on June 27 last year. Moreover, the decline this time round has not been only against the dollar. The rupee, if anything, has shed more value in the last one month against other currencies such as the yen, euro and pound than against the greenback. In other words, what has taken place is a depreciation in some fundamental sense, unlike its earlier weakening that was more a byproduct of a strong dollar, reflective of the US economy doing relatively better compared with Europe or Japan. The latest slide is also significant, as it has come in spite of the Reserve Bank of India’s (RBI) foreign currency reserves depleting by $3 billion during the last week of May alone.

The above renewed pressure on the rupee — rendering even the RBI’s intervention seemingly futile — has largely to do with drying up of forex capital inflows. It is these flows that prevented a free fall in the rupee, despite the Indian economy running a record $90 billion-plus current account deficit (CAD) in its external transactions in 2012-13. Between last July and end-April, before the current round of depreciation, the rupee actually gained by 3.9 per cent against the dollar and almost 28 per cent over the yen. That this happened with just a marginal dip in the RBI’s forex reserves only shows the centrality of capital flows in stabilising the country’s overall balance of payments position.

The present economic context provides little scope for significant improvements on the CAD front, given the limited prospects for exports picking up in the immediate term. Stubbornly high global oil prices and unabated domestic demand for gold, likewise, rule out any sharp reductions in the total import Bill either. That being the case, any slowdown in foreign capital inflows — leave alone reversal — is something India can least afford today. Such flows are a function of both overall global liquidity conditions as well as an economy’s relative attractiveness to foreign investors. So long as India is seen as offering growth prospects superior to most other destinations, it will continue to receive them to finance the CAD and support the rupee. But this also means having policies that explicitly promote growth and remove unnecessary procedural hurdles to investments. A clear example of such counterproductive rules is the recent ‘clarifications’ regarding the operations of foreign retailers — restricting them, for instance, from acquiring the supply chain/backend infrastructure of existing players or not allowing stores to be set up on a franchise basis. Such elaborate do’s and don’ts help neither the cause of Walmart nor that of the rupee.

Related Topics